Weidmann Says 2013 Could Be Year of Decisive Steps to End Crisis

By Jeff Black -
Jan 21, 2013

Bundesbank President Jens Weidmann
said policy makers should take decisive action this year to put
an end to Europe’s debt crisis.

“2013 certainly won’t mark the end of the crisis,”
Weidmann, who also sits on the European Central Bank’s Governing
Council, said in a speech in Frankfurt today. “The adjustment
processes take a while. But 2013 could be a year in which
decisive steps are taken to permanently overcome the crisis.”

Tensions on financial markets have eased since the ECB
announced a new bond-purchase program, prompting European
leaders to begin asserting that the worst of the turmoil that
started in Greece three years ago has passed. Progress on the
so-called banking union, which will install the ECB as
supervisor over the region’s banks, will occupy officials from
the European Union’s 27 member states for much of this year.

“Much remains open, particularly what the end point is
supposed to look like,” Weidmann said. “National interests are
still clearly defined, while the goal of a functioning and
stable currency union sometimes slips out of view.”

The banking union should be the basis for the future
stability of Europe’s financial system and not a tool for
sharing the bad debts that arose in the current crisis, Weidmann
said.

Brussels Meeting

European finance ministers gathering in Brussels today will
likely clash on whether the 500 billion-euro ($665 billion)
European Stability Mechanism can take over bad loans already
made by banks in countries such as Spain or Ireland.

Banking union “cannot solve the current crisis, and it
should not clean up its bad debts,” Weidmann said. “Rather, it
should make the European financial system and with it the
currency union more robust against undesirable developments and
new crises.”

While political agreements on banking union last year were
positive steps, progress must be maintained, Weidmann said.
“These advances are more like stage victories rather than the
end of the race,” he said.

Central banks around the world may have had to pay for the
current state of calm in financial markets with a loss of
independence, Weidmann said, as governments lean on institutions
to save financial systems, stimulate economies and lower
borrowing costs.

Quoting Draghi

Quoting ECB President Mario Draghi, with whom he has
quarrelled over the bond-buying program, Weidmann said central
banks can best protect their independence when they keep to a
narrow definition of their inflation-fighting mandates.

Weidmann was the only ECB policy maker to vote against
Draghi’s plan, announced in September, that pledges unlimited
bond purchases by the central bank for countries that sign up to
economic reform programs. Draghi has credited the program, which
has yet to be used, with removing doubts about the continued
existence of the euro.

“The overloading of central banks with tasks and
expectations is surely not the right way to sustainably overcome
the crisis,” Weidmann said.

The Bundesbank president signaled that Germany’s economy,
Europe’s largest, should recover from a probable fourth-quarter
contraction and suffer only a “dent” in growth.

“There is justification for saying that the weak phase
won’t last too long,” he said.

Growth Outlook

The Bundesbank said in its monthly report today that there
are signs that the recovery is already taking place. The
Frankfurt-based central bank predicts 0.4 percent economic
growth this year and 1.9 percent in 2014.

“All in all, one can say that the outlook, while modest,
isn’t too bad given all the uncertainty” caused by the crisis,
Weidmann said.

Despite the temporary improvement, Weidmann warned about
declaring the debt crisis, and the resulting economic weakness,
as over.

“Crisis-weariness narrows the view to the short-term
calming of the situation,” he said. “But we all know from our
own experience, problems are persistent as long as their causes
aren’t addressed.”